The mangled syntax, sophistry and “jobbing backwards” evident in the Bank of England’s Inflation Report is a wonder to behold.
As Humpty Dumpty said in Alice through the Looking Glass “When I use a word, it means just what I choose it to mean – neither more nor less”, to which Alice replies “The question is whether you can make words mean so many different things”.
Having raised rates in November 2017 (the first rise since 2007) the Bank soothed fears by stating that any further moves would be “limited and gradual”. In the February Inflation Report the Bank delivered an uppercut to the solar plexus of financial markets by changing the message to “earlier and faster”. This, not unreasonably, led money markets to price a high probability of a rate rise in May. Subsequent weak data and comments from Governor Carney reduced this probability, so that today’s no change decision was generally expected.
If it was expected, what’s the problem?
Well, central bank messaging and consistency is worth real money. The risk premium that attaches to UK assets will be a function (amongst many other things) of confidence in institutions, predictability, and some sense of the framework that the central bank is following. Since September 2017, following Bank of England communication has been analogous to walking behind a fellow shopper whose supermarket trolley wheels are defective.
Where the Bank of England will weave next is increasingly difficult to tell. Our view is that the 0.1% Q1 GDP number likely overstated the weakness of the UK economy and was significantly depressed by bad weather. The path to a Brexit transition deal remains bumpy, but in the central case that such an agreement is reached, the UK economy is likely to grow at or above trend in 2018.
If the economy does rebound and the Bank does not make another swerve from “data dependency”, current market pricing of future interest rate rises would appear to be too low.